Russia cuts key rate to 11.5%, as inflation fears ease

The Central Bank of Russia (CBR) has cut the key interest rate by 100 basis points to 11.5 percent, saying inflation risks have weakened as the economy is cooling. The CBR hopes to reach its target of 4 percent inflation by 2017.

“Amid significant
contraction in consumer demand and ruble appreciation in
February-May 2015, consumer price growth continued to slow down.
According to the Bank of Russia forecast, given these factors
annual inflation will fall to less than 7% in June 2016 to reach
the target of 4% in 2017,” the banksaidin a statement Monday.

The CBR added that it
was ready to continue cutting the rate, but the scale of the cut
will depend on inflation in the coming months.

Inflation in Russia has
been steadily falling since reaching its peak in March. In April
it stood at 16.4 percent and in May at 15.8 percent. As of June
8, the annual rate was 15.6 percent with weekly inflation
stabilizing at about 0.1 percent in May-early June, said the
regulator.

Lower interest rate
means cheaper loans for businesses in Russia, which could then
boost economic activity in the country.

The CBR said it expected GDP to contract by 3.2 percent in 2015.
Longer range economic growth will depend on energy prices and the
economy's capacity to adjust to external shocks, the regulator
said. If oil prices recover to $70 per barrel by late 2016, GDP
will grow by 0.7 percent next year. Should prices remain at $60
per barrel GDP will contract by 1.2 percent.

Monday decision marks
the fourth consecutive rate cut this year, which proves the
regulator sees the inflation danger fading and the ruble having
found its fair value.

In April the
rublewasthe
world’s best performing currency of 2015. At its peak it was
trading at about 49 to the dollar, but has seen an 11 percent
downturn since then. Thecontinuedfightingin Ukraine and OPEC’sdecisionnot to cut crude output are the key
factors.

Last week the weekly inflation rate in Russia reached zero, the
first time since early August 2014.

On December 16, the Russian Central Bank hiked the key interest
rate to 17 percent in an attempt to halt the ruble depreciation.
The first reaction saw the currency lose more than 20 percent, with one dollar buying 80
rubles on the day. However, the ruble has significantly recovered
this year, trading at about 55 against the greenback on Monday on
the Moscow Exchange.